Professor Bill Fung, Visiting Professor at the London Business School tipped us off about this fascinating graphic last week. It’s almost 2 years old now, but its message likely remains as relevant as ever: there is no one reliable snapshot of the hedge fund universe. According to research done at London Business School, only 3% of hedge funds appeared in all five major hedge fund databases.
Fung and Duke’s David Hsieh explain in a Q4 2006 report for the Atlanta Fed, that…
“While many hedge funds report to only a single database, some hedge funds report to more than one database. An ongoing project at the BNP Paribas Hedge Fund Centre of the London Business School is merging several databases to achieve a comprehensive picture. A great deal of effort has been expended to obtain an accurate assessment of the statistical characteristics of the hedge fund industry, eliminating the risk of double counting due to the lack of a uniform reporting standard in the industry. At the completion of this project, we will have one of the most comprehensive academic hedge fund databases to work with.”
Fung and Hsieh show the Atlanta Fed an “early output of this project” (below).
This graphic contains a number of interesting findings (note that it was created two years ago and reality may have changed dramatically in the interim):
- The HFR database contained nearly three times as many “unique” funds as that TASS database (by “unique”, we mean funds that report to only one database)
- The HFR database also contained nearly twice as many listings as the TASS database (44% of all hedge funds vs. 25% of all hedge funds).
- 16% of all fund appear in both the TASS and HFR databases – that’s over half of the TASS database also making an appearance in the HFR database. (The highest level of duplication in any database, but a far cry from concluding the TASS database is duplicated by the HFR database.)
“Why is this?”, we asked ourselves. Why do hedge funds only report to one or two databases, not all? For one answer, we need look no further than our own Alpha Male. He used to report results to only two databases. His reasoning, “Those two came to us first, I guess. But it amounted to extra work with limited upside. Problem was, we didn’t want to wimp out after we got started reporting to them. That would look bad.”
Anyway, databases are critical to the way we determine the fundamental value of hedge funds. So we look forward to LBS’s release of “one of the most comprehensive academic hedge fund databases”.